Morningstar Advisor - June/July 2011 - (Page 66)

Gray Matters The Inefficient Pricing of Moats By Warren Miller Why Morningstar’s wide-moat strategy is paying off. The Morningstar Wide Moat Focus Index, an equal-weighted portfolio of the 20 cheapest wide-moat stocks, has generated significant excess returns relative to both the broad market and our overall wide-moat universe. Over the trailing three- and five-year periods, as well as since its late 2002 inception, this strategy has outperformed 95% of large-cap mutual funds. We believe that these excess returns stem from analytical advantages in our moat and valuation processes and behavioral advantages inherent to our long-horizon mind-set. These returns are unlikely to be eroded because they are not attributable to a unique set of market characteristics and are difficult to arbitrage away. What Is a Moat? microeconomic theories: Economic profit attracts competition. Morningstar’s equity analysts work tirelessly to understand this competition and the erosion of economic profits over time and why some firms thrive while others are left behind. Morningstar believes that moats stem from four sources of advantage over competitors: intangible assets, switching costs, network effects, and cost advantages. Analysts judge each stock in Morningstar’s coverage universe against the existence, strength, and Morningstar has been assigning moat ratings since 2002 to provide investors with a quick and consistent gauge of our opinion of the strength and sustainability of firms’ competitive advantages. The backbone of our methodology lies in the most basic of 66 Morningstar Advisor June/July 2011

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2011

Morningstar Advisor - June/July 2011
Letter From the Editor
Questions for the Secret Society
Are 529 Plans a Useful Tool for Clients’ College-Savings Goals?
Taking the Lead
How to Sell Covered Calls
The College-Savings Challenge
Time to Play Defense?
Four Picks for the Present
Investment Briefs
Careful What You Wish For
Caution in Utilities After Japan Crisis
Blossoms and Thorns in the 529 Garden
Lower Fees, Competitive Returns Help More 529s Make the Grade
Morningstar Grades 529 Plans
529 Risks Include the Political
Researching 529 Plans Made Easy
How Closed-End Funds Are Born
Boutique Within a Bank
The Inefficient Pricing of Moats
More Steak Than Sizzle
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The Dangers of Demonizing

Morningstar Advisor - June/July 2011